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Friday, September 14, 2007

Look around the newswires today and you’ll see Third Rock Ventures wrapped up $378 million for its debut venture capital fund. Great news, no doubt, but we have to ask: Can Third Rock Ventures really, as it intends, resurrect early-stage life-science VC?As we reported back in May (Third Rock exceeded its $300 million target), the Boston-based venture firm started by a team of former Millennium Pharmaceuticals Inc. executives is intent upon performing “true venture capital.” You know, the kind of roll-up-your-sleeves, get-your-hands-dirty, or fill-in-any-other-tired-venture-capital cliché to describe the investing that you don’t see a great deal of any more from life sciences VCs, a number of whom seem quite comfortable putting millions into companies with late-stage clinical products.

The principals at Third Rock Ventures want to operate much further upstream. Their aim is to build “product engine companies” capable of employing a novel technique or technology—be it biological, chemical, intellectual or whatever—to develop multiple products and to target multiple diseases. In short, Third Rock wants to build the next Sepracor, Millennium, Alnylam, GlycoFi, Momenta, you name the big-picture company.

And when we say Third Rock wants to build these companies that’s exactly what they intend to do. The six general partners—including former Millennium CEO Mark Levin—expect to hold key management positions at these start-ups during the first year or so. They’ll negotiate the deals, set up the shop, do the hiring, etc., etc. to assure these companies get off to the right start. “We’ll be the start-up team,” says Kevin Starr, the former chief operating officer and chief financial officer at Millennium. The partners will serve CEOs, heads of science, whatever is necessary “to make sure these companies are built the right way, have the right cultures, hire the right people, and do the right partnerships. We are going to get involved in a hands-on way.”

Starr says Third Rock’s approach is “quite different than what is currently out there” in venture firms, and he’s right. No doubt, a handful of venture firms still start companies from raw research (See our recent visit with Polaris Ventures) but it’s usually just part of their portfolio, a small part. Starr expect 75% percent of Third Rock's portfolio to be “product engines” built by the firm's partners' own hands. The remainder will be less complex therapeutics companies developing new drugs or devices. Starr says Third Rock should invest the fund in 12-15 companies in three to four years.

That means Third Rock is providing considerably more than just the sweat equity of Starr, Levin and fellow partners Nick Leschly, Lou Tartaglia and Robert Tepper (they’ve all played big roles in Millennium and other companies, please go here for their full and impressive backgrounds). The firm will be positioned to invest up to $30 million into a single company, which, if the firm executes as it hopes, should provide significant stakes in these companies.

This capital plays into the second-part of Third Rock’s bid for “old school” venture capital—get bigger returns by creating companies that require less capital. The math is fairly simple. Venture investors pouring $100 million to $150 million into a company better hope to see the company’s value hit $500 million to $700 million at some time or another, or else they’re not going to see a venture-style return.

Third Rock’s answer: Max out venture investments at $50 million; get pharmaceutical companies to step in with the capital and infrastructure necessary to perform late-stage clinical trials. “It doesn’t make lots of sense to build large clinical groups in early-stage companies,” Starr says. “It doesn’t make sense to build large regulatory groups. Those are things that pharma does very well. We are going to do that collaboratively with pharmaceutical companies.”

All this sounds simple yet very, very ambitious even for a team accomplished as this one. It's the rare start-up that can, in its first few deals, demonstrate enough value to a partner to justify a major-dollar deal. On average, biotechs raise about $100 million in equity before they're ready to go public; most of the more significant acquisitions raise well north of $50 million before the buyer bites (e.g., NovaCardia had raised $88 million by the time Merck bought it for $350 million--a way-above-average return). For Third Rock Ventures to pull off its strategy, it will need to do...well... a Millennium: the company that managed, while Levin was CEO, to raise, via breathtakingly expensive discovery deals, more partnering capital per equity dollar than any other biotech, carving up the diagnostic and product rights to its technologies like a netsuke master.

Now you can quibble with what happened to Millennium--none of its pharma discovery deals drove value to its partners (for lots of reasons, not all of them Millennium's fault)--see, among our other commentaries, here and here. And largely because the discovery-partnership market dried up, and its discovery engine itself produced less than required, Millennium ended up developing precisely the kind of infrastructure Third Rock's partners say their portfolio investments will eschew.

But it's a new day. Discovery is back in fashion; so is the concept that biotech can make plenty of money providing high-value early-stage material for Pharma (and that Pharma might just as well ratchet way back on its own internal discovery spending). And Mark Levin is preternaturally capable of seizing, and commercializing, a trend. In any event, the new fund's limiteds have faith: the company reached its hard cap after less two months or so on the capital-raising trail. IN VIVO Blog certainly looks forward to watching and we would not bet against these guys. But we’ll tell you more, lessons learned from the Millennium experience, and what others have to say, in the upcoming issue of START-UP. Feel free to offer a comment.

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